Insights

Don't Call It a Comeback

daocat

There’s an old joke – a trader calls the front desk from his hotel room and asks for a wakeup call, and the front desk lady says – “technical indicators are astrology for men.” DAOCAT thinks along these lines, however, at times there are factors that affect the market in the interim that conflict with longer term fundamental views, and they should be heeded.

I’ve been hibernating for a bit as the strategy outlined in redot.com/blog/santa-i-want-eth2-staking some 9 months ago has generated a pretty decent yield and of course the principal has tripled since then, but I felt it’s important to pen this post in a timely manner. While I still believe ETH will flippen BTC in market cap, and will likely become the foundation of the buildings that are financial institutions of the future, it might make sense to play around if you’re happen to be a more short-term oriented trader.

I should have written this somewhat earlier, but it still pertinent -- I believe that in the next couple of months ETH/BTC graph will trend down, possibly to early 2021 levels, meaning Bitcoin will outperform Ethereum (irrespective whether crypto goes up or down).

No, I’m not a BTC maximalist, as I said above, I think that ETH will outperform in the long term, and also other than having an anonymous creator, adoption and the average Joe having heard of it I think ETH is superior to BTC in all ways. The reason for possible BTC outperformance as funny as it sounds is a technical one, having to do with Securities and Exchange Commission (SEC) of the US. Interestingly, the first BTC ETF application into the SEC was all the way in 2013, and of course was shut down by the “establishment”. Subsequently every single application has been shut down or put on ice. Meanwhile, Commodity Futures Trading Commission (CFTC) approved futures and options trading which now trade on the Chicago Mercantile Exchange and has been a boon, growing in volume and open interest cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.contractSpecs.html.

This said, with so many different opinions and various US alphabet agencies with their own opinions, none is more powerful when it comes to investments and investors as SEC. However, no matter how many times issuers tried to convince and explain that instead of complicated digital wallets, and storing seed phrases, simply firing up any broker and buying an ETF would be simpler for the proverbial grandma, or a pension fund manager in his 60s, the regulator did not budge. Well, it seems that the time has come, and according to a Bloomberg report, bloomberg.com/news/articles/2021-10-08/wall-street-could-get-four-bitcoin-futures-etfs-by-end-of-month, not one, but possibly several of the pending applications for BTC ETF might come to fruition.

To understand exactly what the impact of a listed US ETF will be let’s look for a second at the smaller northern hockey playing, maple syrup eating twin. Canada Purpose Bitcoin ETF Holdings as of this writing studio.glassnode.com/dashboards/market-purpose-bitcoin-etf holds over 21 thousand BTC.

If we were let’s say to scale that back to the baseball playing, hamburger eating neighbors, dividing by the size of Canadian equity market: $3.1 trillion, and multiplying by USA’s $47 trillion, we’d get just north of 318.5K bitcoin or close to $18 billion volume that needs to be bought. Mind you that while surely some US entities and individuals have bought the Canadian ETF, and it can be argued that we should scale down this number, conversely, the investment management industry in the US is so much greater in the US than Canada that it the ratio of the two different markets probably does not capture the amount they’ll want to or have to buy (per their mandates), if only to get a small 50-100bps allocation.

What’s interesting is that the applications which have been filed are based on futures underlying, and of course these futures will have to be onshore, meaning on CME. Looking at CME volumes cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.html for last Friday in the on the run (most liquid contract) future, and multiplying by 5 bitcoin per contract we see that about $1.4 billion or 25315 BTC equivalent has traded. Let me remind you, to get to a similar open interest as the Canadian ETF we’d need $18 billion or almost 13 times as much (3 weeks’ worth of volume)!

Needless to say, While DAOCAT is not a huge fan of technicals, the sheer buying pressure from all the investors that could not own BTC before, and will now be able to through this easy instrument will be immense, and should propel BTC ahead of ETH in the short term. It actually seems that some hedge fund players and those in the know have started frontrunning this, as can be inferred by the ETH/BTC price action of late, but DAOCAT believes that we haven’t seen the full force of this reversal yet.

Another interesting optionality here are countries similar to El Salvador, who don’t have their own strong currency, are pegged to USD or just use USD, which might do a Bukele by the end of 2021. It’s clear that they are just wrapping their heads around blockchain and want to be populist, but don’t yet understand the incremental power of Ethereum, versus Bitcoin. After all so far only Satoshi’s statue has been erected, hungarytoday.hu/hungary-first-statue-mysterious-bitcoin-creator-satoshi-nakamoto, and not yet Buterin’s. One more tidbit that crossed my screens today is that unfortunately Tim Beiko and James Hancock are proposing moving the difficulty bomb to May 2022 eips.ethereum.org/EIPS/eip-4345, increasing the likelihood that POS on ETH will be moved out by another half a year and postponing the ETH2 related ETH rally.

Last but not least, I’ll repeat, this is a short run phenomenon, and in the long term, DAOCAT firmly thinks that there will be more infrastructure in Ethereum, SEC might even approve an ETH ETF (in 2022), and ETH2 will start working which will just be a massive game changer (hopefully 2022). In fact, what DAOCAT is tempted to do is use this as an opportunity to scale out of BTC at ETH/BTC levels of 0.05 or perhaps even 0.04. Also, for the clever algo traders, get your robots ready for when the ETF news hits Bloomberg, as this should cause complete imbalance between offshore Futures markets on Deribit, Binance, Huobi, et al., versus CME onshore market, and will be a great arbitrage opportunity.


This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

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